Post-Rout Rally Likely for Oil but OPEC Concerns Remain in Place

Key Points:

• Buying pressure should be returning this week.

• Multiple technical reading suggestive of a reversal.

• Fundamentals likely to cap upsides around the 51.55 handle.

Following a much larger than anticipated drawdown in US Crude Inventories, the recent oil rout is levelling out which means buying pressure is likely to be coming down the line in the immediate future. Moreover, both the near and medium-term technical biases are indicating that a bottom has been reached which will also be adding to bullish sentiment. Despite this, overall upsides may be limited which is worth taking into account.

Starting with the long-term technicals, the key structure to keep in mind is that rising wedge which began approximately 12 months ago. Notably, the recent rout has brought oil prices into conflict with the downside of this pattern, which would typically necessitate some upside action, moving ahead. Indeed, this shift in momentum is already becoming apparent given the rather muted moves made by oil over the prior 3 sessions.

This shift in bias comes as little surprise given the developments in a number of near-term technical readings. In particular, a potential ascending triangle or bullish pennant is shaping up which will be reinforcing the effects of the long-term wedge. However, in addition to this, we can also see that stochastics have been pushed into oversold territory around a historical reversal point which will be spurring the bulls into action.

If enough support can be recruited, we expect to see oil prices make their way higher over the next few weeks, potentially even back to above the $50 handle. Although, overall gains are likely to be capped around the 51.55 level as this represents the intersection of the upside of the near-term triangle and the 50.0% Fibonacci retracement. What’s more, even getting to this price involves closing back above the 100 day EMA which may prove rather difficult this time around as a result of uncertainty regarding OPEC.

Speaking of the cartel, it’s slipping grip on the market is becoming evident for a number of reasons but one recently reported statistic stands out. Specifically, we saw a record uptick in global Oil shipments by tanker to 50.3M barrels last month which can’t be a good sign for those wanting to see oil well above the $50 handle. Additionally, Russia is proving reluctant to sign on for an extension of the freeze which will reinforce resistance substantially.

Ultimately, the combination of both the technical and fundamental biases illustrate that, while we can expect to see buoyancy return moving ahead, the 51.55 level should remain a robust zone of resistance. As a result, we may have to see a break out of some form or another in June to resolve the developing disconnect between technicals and fundamentals and this is worth watching out for.